Savings rates are back, but is the 'loyalty penalty'?

The Bank of England has today lifted interest rates to 3% from 2.25%, the biggest jump since 1989. For those households who are holding cash savings, higher rates are at least a silver lining in the economic gloom. But higher interest rates bring back familiar concerns for banks and building societies...

It was back in 2010 that Consumer Focus (since absorbed into Citizens Advice) made a super complaint to the Office of Fair Trading about the differences in cash ISA interest rates between those who shopped around and those who didn’t. After a short study, the OFT concluded that switching ISAs was the big problem, and required providers to introduce the cash ISA transfer service in 2012.

The FCA then picked cash savings for its very first market study in 2013. Its concern was that “providers may be able to reduce interest rates on existing savings accounts without needing to worry about consumers switching to other suppliers or other savings products”. Their study confirmed their concerns that longstanding customers were paid less than new customers. They introduced several remedies to improve the transparency of savings, including making it much easier to find interest rates on statements and in online banking.

By 2018, the FCA had recognised that these “interventions to date have had limited impact on addressing the harm to longstanding customers”. It therefore opened a discussion paper that considered introducing a ‘single easy access rate’ (SEAR). The SEAR would be a single rate of interest, set by the firm, that applied to all accounts after 12 months. This would have been a significant price intervention – the FCA estimated it would provide a net benefit to customers of between ￡150m to ￡380m per year. However, interest rates (which had already dropped a lot between 2010 and 2018) hit rock bottom at the height of the Covid pandemic. And so the FCA abandoned its proposal in 2020.

Roll on two years and we may now be seeing a return to higher rate differentials. The same concerns are also re-emerging, as illustrated by a headline in The Guardian last week that “inertia or an excess of trust results in billions of pounds languishing in accounts paying little or no interest”. Now the concern is about interest rates for longstanding customers not rising, rather than firms reducing interest rates for existing customers. But the outcome – lower rates for longstanding customers – may be the same.

This issue will be an early test for the FCA's new Consumer Duty and the Principle for firms to act to deliver good outcomes for customers. Does the market look much as it did in 2018 with the FCA having widespread concerns about lower rates for longstanding customers? Or will the FCA be satisfied that the interest rate for longstanding customers is “reasonable relative to the benefits of the product” for individual firms, and across the market as a whole?

A question to ponder on for now, which I’ll return to in a subsequent post next week.